Speculation is not a major cause of market volatility in commodity markets, although it can amplify underlying price movements, the Futures and Options Association said at a briefing in London Tuesday.

According to an independent study produced by economic research group FTI Consulting on behalf of the FOA, fundamental supply and demand factors have been the main driver of price movements in recent years, although the exact proportion of the influence of speculators compared with fundamental factors is still up for debate.

Anthony Belchambers, chief executive of the FOA, said it's important to adopt a "balanced approach in recognizing the key role of speculators in contributing to market liquidity and facilitating the risk management transactions of real economy enterprises--a capability that is critical in the current economic climate."

The role of speculators has been hotly debated for some years, and regulators in the U.S. and Europe are considering stricter positions limits on energy, agriculture and metals derivatives in an attempt to curb the potential manipulation of prices to unnaturally elevated levels.

Belchambers urged that government regulators exercise caution in implementing new position requirements on commodities.

"The government must be very careful about what action they take," he said. "If you're exercising position management, then it must be on the basis of public criteria."

While the excessive 'financialization' of commodity markets has the potential to damage the price formation process if it causes a strong disconnect between market prices and fundamental supply and demand, speculation can also play a key role in providing liquidity to the markets, arguable reducing market volatility, he added.

"We mustn't lose sight of the importance of free markets," he said.

The Futures and Options Association is the principal European association for the futures and options industry, representing its interests in the public and regulatory domain.